T.C. Summary Opinion 2006-86
UNITED STATES TAX COURT
GERALDINE ANN PECK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22437-04S. Filed May 23, 2006.
Geraldine Ann Peck, pro se.
Jeremy L. McPherson, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petition was filed. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s 2000
Federal income tax of $8,887. After a concession by petitioner,1
the issue for decision is whether petitioner’s gross income
includes $50,000 of settlement proceeds she received from her
former employer.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts with attached exhibits, and an
additional exhibit admitted at trial, are incorporated herein by
this reference. At the time the petition was filed, petitioner
resided in Redding, California.
Petitioner began working as a special education teacher for
the Shasta County Office of Education (SCOE) in 1986. By the
late 1990s, petitioner’s relationship with SCOE had deteriorated
significantly. In 1999, SCOE had petitioner evaluated by a panel
of mental health experts and filed a complaint against her in
State court. The complaint alleges that petitioner is mentally
unfit to teach and seeks to place her on mandatory sick leave.
SCOE filed the complaint as part of its efforts to terminate
petitioner’s employment.
1
Petitioner concedes that a $491 income tax refund she
received from the State of California is taxable. The remaining
adjustment in respondent’s notice of deficiency is computational;
therefore, we do not address it.
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Petitioner denied that she was unfit to teach. A pleading
petitioner filed with the State court asserts: (1) Petitioner
“is not suffering from a mental illness which prevents her from
performing her duties as a special education teacher”; and (2)
“even if she does suffer from a mental illness * * * she is more
than competent to perform her duties”.
In September 2000, the State court case was resolved
pursuant to a written settlement agreement. Petitioner resigned
her position and executed a release of claims against SCOE. In
exchange, SCOE paid petitioner $50,000.
On her 2000 Federal income tax return, petitioner did not
report the $50,000 as gross income. Petitioner had suffered from
various physical ailments during her employment with SCOE,
including diabetes, inner ear pain, and impetigo. Petitioner
believed that the $50,000 was, in whole or in part, compensation
for these injuries and therefore nontaxable. Respondent
determined that the $50,000 was includable in petitioner’s gross
income and issued a notice of deficiency to petitioner on
September 2, 2004.
Discussion
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears
the burden of showing that the determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant
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to section 7491(a), the burden of proof as to factual matters
shifts to respondent under certain circumstances. Petitioner has
neither alleged that section 7491(a) applies nor established her
compliance with the requirements of section 7491(a)(2)(A) and (B)
to substantiate items, maintain records, and cooperate fully with
respondent’s reasonable requests. Petitioner therefore bears the
burden of proof.
A taxpayer’s gross income includes all income from whatever
source derived unless excluded by a specific provision of the
Internal Revenue Code. Sec. 61(a). Gross income does not
include “the amount of any damages (other than punitive damages)
received (whether by suit or agreement and whether as lump sums
or as periodic payments) on account of personal physical injuries
or physical sickness”. Sec. 104(a)(2). To qualify for this
exclusion, the taxpayer must demonstrate: (1) The underlying
cause of action giving rise to the recovery is based upon tort or
tort type rights; and (2) the damages were received on account of
personal physical injuries or physical sickness. Commissioner v.
Schleier, 515 U.S. 323, 337 (1995); Allum v. Commissioner, T.C.
Memo. 2005-177. The terms “physical injury” and “physical
sickness” do not include emotional distress, except to the extent
of damages not in excess of the amount paid for medical care
attributable to emotional distress. Sec. 104(a) (flush
language); see also Prasil v. Commissioner, T.C. Memo. 2003-100.
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When damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such amounts are excludable under
section 104(a)(2). United States v. Burke, 504 U.S. 229, 233
(1992); Prasil v. Commissioner, supra. The determination of the
nature of the claim is a factual inquiry and is generally made by
reference to the settlement agreement. Robinson v. Commissioner,
102 T.C. 116, 126 (1994), affd. in part and revd. in part 70 F.3d
34 (5th Cir. 1995). If the settlement agreement lacks express
language stating what the settlement amount was paid to settle,
we look to the intent of the payor, based on all the facts and
circumstances of the case, including the complaint that was filed
and the details surrounding the litigation. Knuckles v.
Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C.
Memo. 1964-33; Allum v. Commissioner, supra.
Here, the settlement agreement provides that SCOE will pay
petitioner $50,000 in exchange for her resignation and a release
of claims. The settlement agreement does not mention
petitioner’s diabetes or other ailments. Instead, it refers
generally to “Disputes and disagreements” between the parties and
contains boilerplate language that releases SCOE from “any and
all claims” by petitioner.
Looking beyond the settlement agreement, we likewise find no
indication that SCOE intended the $50,000 to compensate
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petitioner for physical injuries. The complaint that SCOE filed
in State court alleges that petitioner is mentally unfit to
teach, but it says nothing about her physical health. The other
pleadings filed in connection with the State court case also omit
any mention of petitioner’s physical condition. Petitioner
argues that she suffered work-related physical injuries while
employed with SCOE and that SCOE was aware of her injuries. Even
if petitioner is correct, however, the question is whether the
$50,000 was paid on account of such injuries. See sec.
104(a)(2). There is nothing in the record linking the settlement
proceeds to petitioner’s diabetes or other physical injuries.
Accordingly, respondent’s determination is sustained. Based on
our resolution of this issue, we do not address whether the
underlying cause of the State court action was based upon tort or
tort type rights. See Allum v. Commissioner, supra.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.